US Affordable Rental Housing Policy Either Doesn’t Make Any Sense or Is Working as Intended

Affordable rental housing policy fails to provide sufficient affordable rental housing decade after decade, yet policymakers continue to do largely the same things. A researcher at the Joint Center for Housing Studies recently observed that in 1960, about 45 percent of renters in the bottom income quintile spent more than 50 percent of their income More

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Affordable rental housing policy fails to provide sufficient affordable rental housing decade after decade, yet policymakers continue to do largely the same things. A researcher at the Joint Center for Housing Studies recently observed that in 1960, about 45 percent of renters in the bottom income quintile spent more than 50 percent of their income on housing costs. Today, it is about 65 percent. Renters below the official poverty line spend on average 78 percent of their income on housing. At what point will policymakers admit that their policies have failed renters?

It Doesn’t Make Sense: The Low-Income Housing Tax Credit

Affordable rental housing policy now primarily relies on the Low-Income Housing Tax Credit (LIHTC). LIHTC seems like a rather bad idea if one is interested in addressing the affordable rental housing crisis. LIHTC has a number of problems, but two of them should be considered fatal flaws. First, LIHTC is not very good at providing low-income rental housing. The Joint Center for Housing Studies states, “LIHTC does not necessarily protect a renter from cost burdens” and that“lower-income renters living in LIHTC units often require additional subsidies to make this housing affordable.” The primary policy to create affordable rental housing does not do a very good job at creating affordable rental housing, yet policymakers rely on it more and more.

The second major problem is that LIHTC rentals typically convert to market rate after 30 years (in some cases 15 years). This transition rate might be reasonable if there were an adequate supply of affordable rental housing, but there isn’t. The National Low-Income Housing Coalition estimates that the United States has a shortage of 7.3 million rental homesfor the lowest-income renters. The Joint Center for Housing Studies finds that the country lost 2.1 million rental unitsfor these lowest-income renters between 2012 and 2022. Affordable rentals are too scarce to allow them to be converted to market-rate housing.

The current estimate is that 325,000 LIHTC rental units will transition to market rate by 2029. LIHTC creates a rental housing bucket with a hole in the bottom. Since more and more of our affordable rental housing is created by LIHTC, the amount of affordable rentals lost to market conversion will increase over time. The United States already does not build enough affordable rental housing to keep up with demand, but policymakers have created a system that will lead to accelerating losses of affordable rental housing over time. This doesn’t make sense.

Affordable Rental Policy Is Working Well for Corporations and Investors

Current affordable rental housing policy doesn’t make sense if the goal is to provide affordable housing. If the goal is to create market conditions beneficial to real estate developers and investors, it appears to be working quite well.

Public housing, especially when adequately funded, is a far more effective method of providing affordable rental housing than LIHTC. The rate of cost-burdened renters is quite low in public housing — much lower than in LIHTC housing. Because of this fact, there are very long waiting lists and tremendous demand for public housing.

From the private real estate industry’s perspective, public housing is a serious threat. “From the beginning, the real estate industry bitterly fought public housing of any kind,” Richard Rothstein stated in The Color of Law: A Forgotten History of How Our Government Segregated America. Rothstein adds that the industry later lobbied to structure public housing so that it would be underfunded. Today, after the passing of the Faircloth Amendment, Congress has prohibited the increase in the number of public housing units built by the federal government in spite of the fact that people are, in some cases, waiting for decades to get into public housing.

In addition to investors receiving more and more via tax credits from the LIHTC program, the Joint Center for Housing Studies reports that corporate owners make up a growing share of the rental housing market. (The corporate share of rental properties ranging from 5 to 24 units nearly doubled between 2001 and 2021.) More private equity firms have also moved into the rental housing market. While more and more renters are being cost-burdened, it appears that more corporations and investors are making good profits.

It is possible to create affordable rental housing policies that work well for renters. There are good social housing models in Europe and Asia. Social housing is nonprofit housing. In the European models, it is not restricted to just the lowest income households, which tends to provide it with a stronger political and economic base. The good news is that US city and state governments are beginning to explore these models. In Congress, Representatives Alexandria Ocasio-Cortez, Cori Bush, and Becca Balint, Senator Bernard Sanders and other members of Congress have recognized the need to repeal the Faircloth Amendment. Once that Amendment is gone, the federal government can move toward constructing affordable, quality social housing.

This first appeared on CEPR.

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